"The dog ate my homework" probably won't work as an excuse for Ed DeMarco, the embattled acting director of the Federal Housing Finance Agency.
DeMarco is overdue on his promise to tell the White House and Congress whether he will reverse his stubborn opposition to principal reduction -- a practice that allows underwater homeowners to refinance their mortgages at the real value of their homes.
It's been six weeks since the Treasury Department announced that it was tripling incentives for lenders to reduce principal on underwater homes as part of the administration's HAMP foreclosure prevention program. This new policy was supposed to persuade DeMarco to come down from the ledge.
But DeMarco says he is still evaluating the proposal. He is also more than two weeks late in providing Congress with the data he has used to justify his position. In the meantime, housing experts have eviscerated DeMarco's analysis. At a March 15, 2012 Senate Hearing Laurie Goodman, Senior Managing Director at Amherst Securities pointed to three fundamental flaws in his calculations and called on DeMarco to reverse his blanket opposition to writing down mortgage balances.
I've heard that economists who work for DeMarco and the entities he regulates have told him that principal reduction is a no-brainer. According to well-respected report by Moody's Investment Services, even without the increased subsidies, reducing principal makes financial sense because it increases the chances that homeowners will stay current on their mortgages.
With the tripling of the incentives in the Treasury's foreclosure prevention program, the case becomes even stronger. In fact, according to what I've been told, DeMarco's own people have given him an analysis that says that loans owned by Fannie Mae and Freddie Mac would be worth more to investors if principal balances were brought down real property values.
Odds are that DeMarco will ignore what he is hearing from the economists and maintain his position of blanket opposition to principal reduction. He'll probably talk about Fannie Mae and Freddie Mac not having the administrative systems to process mortgage write-downs. And the so-called moral hazard of helping underwater homeowners -- even though most proposals for principal reduction involve the bank and the homeowner sharing in the value from any increase in property values.
What is becoming clearer is that political not economic or moral calculations are driving the debate. DeMarco was appointed by President Bush and has been able to stay in his position because of the protection of Alabama Senator Richard Shelby. Shelby -- who's taken $1,978,987 in campaign donations from Wall Street since 2007 -- has protected DeMarco by blocking the nomination of a permanent director at the agency. From the outside it looks pretty clear that Shelby and his allies on Wall Street are protecting DeMarco and DeMarco is towing the line.
If DeMarco says no again or continues to delay, the ball is in the court of President Obama. He has the power to fire DeMarco immediately and replace him with another acting director. The President also has the power to nominate a permanent director for the Federal Housing Finance Agency. If the Senate blocks his nominee, Obama can make a recess appointment.
Pressure is building for action. Just last week, underwater homeowners from Las Cruces, New Mexico to Brockton, Massachusetts rallied to press for debt relief. A new web site called America Underwater is part of a coordinated campaign by community, faith and online organizations to press for more than $300 billion in principal reduction. The America Underwater site has a tumblr with photos of people in front of their underwater homes, showing the human consequences of the standoff between DeMarco and Obama.
Every day DeMarco waits another 2,225 homeowners lose their homes. So the clock is ticking not just for DeMarco but also for American homeowners.